Max Cost Efficiency: 3 Functions Explained

1st Function: Maximum cost efficiency occurs at the point the average cost is minimum. In function 1 it is when Q = 17

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The diminishing return happens where the marginal cost starts to go up, and in this function, it is where Q=10

2nd Function: Maximum cost efficiency occurs at the point the average cost is minimum. In function 2 it is when Q = 6

The diminishing return happens where the marginal cost starts to go up, and in this function, it is where Q=1

3rd Function: Maximum cost efficiency occurs at the point the average cost is minimum. In function 3 it is when Q = 26

The diminishing return happens where the marginal cost starts to go up, and in this function, it is where Q=1

PART C: Relationships between MC and AVC and MC and AC

1st Function: Both AVC and MC decline initially, which takes place some point between 10-15 units where both are equal before MC begins to increase by amounts that are higher than AVC. The MC and AC initially decline, C with an amount that is higher as MC declines first before beginning to rise. Between 15-16 units both are the same and MC begins to rise as AC remain constant. Both the AC and AVC do not meet as the fixed cost gap exists between them (Heathfield, 2016).

2nd Function: Here, the AVC and MC keep on increasing as the units increases, and they do not meet. AC declines but afterwards increases as the units increases. MC continues to increase as the units increases, and they meet at a point where five units are the actual quantity. AC and AVC do not meet each other due to the fixed cost gap (Hall, 2018).

3rd Function: In the equation, the AVC and MC are the same, and they overlap each other. The AC and MC do not meet each other in this situation. The MC initially declines and become level at a certain level, which is 60. Here, the AC and AVC do not meet due to the fixed cost gap (Heathfield, 2016).

References

Hall, R. E. (2018). New evidence on the markup of prices over marginal costs and the role of mega-firms in the US economy (No. w24574). National Bureau of Economic Research. https://www.nber.org/papers/w24574

Heathfield, D. F. (2016). An introduction to cost and production functions. Macmillan International Higher Education. https://books.google.com/books?hl=en&lr=&id=sENdDwAAQBAJ&oi=fnd&pg=PR9&dq=marginal+cost+and+average+cost+relationship&ots=u2ZXnmZzkn&sig=j_SVzCiiP3zkpjkxYKfSrmyrIoY